Oil climbs, reversing six-session drop

OPEC speaks; crude stocks rise less than expected

NEW YORK (CBS.MW) -- Oil prices closed near $26 a barrel Wednesday, driven by indications that OPEC might take further action to stanch a nearly $4 decline in prices over the last six sessions, as well as a smaller-than-expected rise in last week's domestic crude stocks.

Crude for June delivery closed at $25.80 a barrel, up 56 cents on the New York Mercantile Exchange. It gained as much as $1.26 earlier in the session.

The contract, however, still logged a more than $3-a-barrel loss for the month after suffering from a $3.71 a barrel decline in the past six previous sessions. Traders have been assessing the likelihood of a global supply glut in the face of an expected seasonal decline in demand.

But crude prices found support Wednesday after OPEC's top official that indicated that OPEC could take action before its regular meeting on June 11 in Doha, Qatar to stem the fall in prices.

Following crude's sharp declines in recent days, "it's not surprising that participants would take OPEC President Abdullah al-Attiyah's comments as a signal to cover some shorts," said Michael Fitzpatrick, analyst at Fimat USA, in a note to clients.

After a meeting with U.S. Energy Secretary Spencer Abraham, news agencies quoted al-Attiyah as saying he's "very concerned about the decline in prices," and is "working out something" with other OPEC ministers "to intervene in the market." He also said the cartel is "studying all issues that threaten the balance of supply and demand."

The market could interpret that comment to mean that OPEC members are prepared to act "sooner rather than later," said John Person, head financial analyst at Infinity Brokerage Services.

Fitzpatrick, on the other hand, said that although al-Attiyah didn't outline a concrete plan, his comments "can only lead to more confusion," after the cartel's "phantom production cut last week."

OPEC voted last week to raise output quotas by 900,000 barrels, to 25.4 million per day, starting June 1 -- an effort aimed at actually reducing 2 million barrels per day from actual production.

Market cheers smaller oil supply climb

Adding to fuel to crude's rally Wednesday were reports that last week's crude supplies rose less than many market experts had anticipated.

Early Wednesday, the Energy Department posted a 1.8 million-barrel rise in crude inventories for the week ended April 25. Total stocks of 288 million barrels are still down 11.7 percent from the year-ago level, the government said.

The API reported a 1.2 million-barrel rise to 288.6 million barrels.

Tim Evans, senior analyst at IFR Pegasus in New York, was looking for an increase of 3 million to 5 million barrels, while Fitzpatrick expected an increase of 4 million barrels.

"While crude-oil imports continued on a high level by historical standards, they fell far short of the record level reached during the previous week," said Thorsten Fischer, an economist at Economy.com.

The Energy Department pegged imports at 9.7 million barrels, down 900,000 barrels from the previous week.

"Increased crude refinery input and a moderate increase in refinery capacity utilization resulted in a modest increase in crude stocks," said Fischer.

Still, according to Joshua Sadler, vice president at the energy trading desk of Societe Generale, continued replenishment of stocks would confirm two factors -- "normally" declining second-quarter demand, which runs at around 2 million barrels per day, as well as the outbreak of severe acute respiratory syndrome and its effect on the unsteady global economy. See SARS update.

Gasoline stocks rise

The latest supply reports also pointed to a significant increase in gasoline inventories in the latest week.

Motor gasoline inventories rose 4.4 million to 205.6 million barrels in the latest week, the Energy Department said -- that's still 4.9 percent below the year-ago level.

The API reported a 3.9 million-barrel increase to 206.7 million barrels.

Despite the increase, "more needs to be done to ensure adequate supplies of motor gasoline during the summer driving season," said Fischer.

Meanwhile, distillate stocks, which include heating oil, stand at 95.9 million barrels -- down 200,000 barrels for the week and down 21.8 percent from the level of a year ago, the government said.

Stocks are measured by the API, however, actually rose by 200,000 barrels to 96.5 million barrels.

Evans expected distillate and gasoline stocks to each post a rise of between 500,000 barrels and 1.5 million barrels. Fitzpatrick forecasted a fall in distillates on the order of 1 million barrels, but an increase in gasoline supplies of around 1.25 million barrels.

Following the news, May heating oil rose 3.1 cents to close at 76.14 cents a gallon, while May unleaded gasoline added 1.34 cents to 84.28 cents a gallon.

The June contracts for the petroleum product futures, which became the lead-month contracts at the session's close, also climbed. June heating oil closed at 68.51 cents a gallon, up 1.45 cents and June unleaded gasoline rose 0.14 cent to close at 79.52 cents a gallon.

Analysts still expect lower prices

Despite crude' strength Wednesday, many analysts said fundamentals in the oil market still indicated that lower prices are still in store for oil.

"The backdrop for crude is simply this: the supply concerns are drying up," said Grady Garrett, chief trading strategist at EnergyTrendAlert.com, a commodity information provider.

He noted that Venezuela, Nigeria and Iraq "all seemed to conspire to send prices higher." But the Iraqi fields are now in coalition hands, OPEC's production is running well above its current quota and production from Venezuela and Nigeria are at or near normal levels.

Venezuela's production is near its pre-strike level of around 3 million barrels per day, while Nigeria's output is rising to just over 2 million barrels per day, or 160,000 barrels per day below the norm amid ethnic violence in the region.

Economy.com's Fischer also believes the recent decline in crude futures will likely resume. He sees OPEC's decision last week as one of the major factors pointing to lower prices.

"The meeting revealed that overproduction was rampant and that compliance with official quotas was all but absent," he said. "It is unlikely that OPEC will succeed in taking 2 million barrels per day off the market."

As a result, Fischer expects prices for West Texas Intermediate crude oil to trade in the mid-$20s for now. Once inventories have been "replenished to approach more normal levels, prices will ease to the low $20 per barrel range," he added.

Natural gas rises

Meanwhile, natural-gas futures closed higher ahead of its own supply update, due out from the government on Thursday.

The June natural gas contract closed at $5.385 per million British thermal units, up 14.9 cents.

The Energy Department will report its update on natural-gas supplies early Thursday. Fimat's Fitzpatrick expects the report to reveal a 52-billion-cubic-foot rise in stocks, although market estimates range from a rise of 40 billion to 70 billion cubic feet.

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